Often
we fall prey to not being able to see the forest because of the trees. The details overwhelm us and we miss the
proverbial big picture. When it comes to
the compliance of your credit calculations, I’m afraid these days the opposite
may be taking place.
The
nuances and parameters driving the calculations that create credit
disclosures reside at such an esoteric, granular level that a long list of “900
lb. Gorillas” is currently over- crowding the room -- disparate impact, fair
lending, ATR, QM, UDAAP, HMDA data -- none of which are focused on the
integrity of how you calculate your traditional disclosures.
The
consumer credit mathematics is often over-looked and, yes, taken for granted
that it’s “just math” and influenced by the “we just need to find someone with
an advanced mathematics degree” mind-set.
But
if you have ever spent much time trying to unravel your institution’s settings,
parameters, interest accrual methods, rounding options etc., you know the
consumer credit math is its own animal when compared to mainstream, everyday
arithmetic.
With
the expansion of regulatory requirements it is paramount that all facets of a
lender’s operation “cross foot and balance” so to speak. We are calling that process “alignment.”
Alignment
means the same methods are used throughout the life of the transaction. The narrative description in the lending
agreement states the lender will compute and accrue charges according to
certain rules and parameters. The disclosure numbers populating the agreement
are the product of employing those rules and parameters. The back end servicing
calculations actually collect the charge in the exact same manner. It all matches.
Sounds
simple, right?
You
would be surprised how often we see lending documents state that “charges will
be computed on a 365 day year” in the promise to pay section, yet the numbers
populating the form are generic,
periodic, 30/360, HP 12C type calculations.
Those generic calculations are much simpler
to program and compute and, most likely, have been embedded in the loan
origination system for decades. We’ve
got an incongruity right off the bat and we haven’t even gotten to the servicing
calculations yet.
There
is a train of thought that “it all comes out in the wash” with the interest
bearing, a.k.a. “simple interest”, transactions that dominate today’s credit
market. “The consumer isn’t going to
make all of their payments exactly on due dates anyway, so what’s the big deal
about the regular payment?”
Well, beside the advent of debit/e-check/ACH
payment proliferation rendering the previous adage practically unserviceable,
there is the battle to define, determine, and evade the newly created CFPB
two-headed specter of “deceptive” and “abusive”.
What
better defense than all phases of your operation accurately and consistently
portraying the contractual obligation between the lender and the borrower?
It might be worthwhile to step out of the dense compliance forest for just a moment and take a close look at the tree that houses your system calculation engine.
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